The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

The Theory of Contrary Opinion

Though contrarianism may seem like a way to time the stock market simply by doing the opposite of everyone else, it is not. Simply going against the crowd is being disagreeable for the sake of disagreeableness. Sometimes the crowd is wrong. Sometimes the crowd is right. Contrarianism is best used to add nuance to your thinking and as a tool to always question the crowd’s thinking and actions. In an endeavor like investing, which invariably involves lots of people, you have to learn to deal with the mob to avoid being trampled by the mob. You have to develop mechanisms that help you question the mob’s behavior. You need to retain your sanity against what former Federal Reserve Chairman Alan Greenspan called irrational exuberance, the impulse that leads you to cease to think and mindlessly react and follow the crowd.

Bernie Schaeffer has spent decades studying contrarianism. His firm, Schaeffer’s Investment Research in Cincinnati, Ohio, has made contrarian investing a hallmark of their investment process. Schaeffer says the central principle of contrarian investing is very basic, and very difficult to dispute. “When everyone is bullish, buying power has been exhausted. A top is at hand, and the next major move is down,” he says. “When everyone is bearish, selling pressure has been exhausted, a bottom is at hand, and the next major move is up.”7

The commentary that frames these market moves often offers great clues into the future. By reading newspapers, ...